Farewell, consensus future?

Back in 2010, I wrote a piece called Our Consensus Future, which tried to set out what I thought represented a fairly broad consensus forecast for the global economy over the medium term. It was a view of the world underpinned by the idea of the Great Convergence, and which was reflected in range of publications and policies, including the recent Asian Century White Paper.

Yet, as I noted on The Interpreter at the time, the widely shared confidence in this 'consensus future' across international financial institutions, investment banks, governments, consultancy shops and, yes, think tanks, was actually a bit surprising given that the financial crisis had only recently delivered a stinging reminder to us all of the perils of forecasting in a world of black swans and fat tails. In particular, while I agreed that some version of this future was the most likely scenario for the global economy, I also argued that the probability then being assigned to this particular set of scenarios might well turn out to be too high.

All of which is a roundabout way of saying that I have a slightly different take to Steve Grenville as to why the current growth travails in emerging markets have been garnering so much attention. In particular, I wonder if what we are seeing might represent a fundamental reassessment of the risks and probabilities associated with a whole range of forecasts about likely emerging market performance, rather than just the latest anxiety attack to grip market participants (although I can't rule out the latter, either).

It was notable, for example, that the IMF, in the latest update to its world economic outlook, both cut its forecasts for emerging market growth and warned that 'risks of a longer growth slowdown in emerging market economies have now increased, due to protracted effects of domestic capacity constraints, slowing credit growth and weak external conditions.'

In other words, this bout of angst over emerging market prospects suggests to me that 'our consensus future' may no longer be the shared view it once was, and that as a result I might now have to retire the term.

Of course, some of the current gloom reflects transitory factors including the impact on market sentiment of the June-July mini sudden stop in capital flows to emerging markets, triggered by the Fed's musings on whether to taper its program of asset purchases, as well as the ongoing run of weak growth data out of emerging markets, led by China. In addition, however, investors seem to have (re-)discovered a whole list of risks to the underlying emerging markets growth story, including fears about the impact of an international environment that's less friendly to emerging economies (less rich-world demand, softer commodity prices), the need to reinvent national growth models accordingly, worries about social and political stability and, of course, the difficulties involved in escaping the middle income trap.

Some of the current reassessment is probably overdone, but some of it is probably overdue as well. Certainly, taking a more cautious view on the likely trajectory for emerging markets as a group seems reasonable, given the scale of the challenges many of these countries still face.

Meanwhile, for now I am going to stick with the view I've set outbefore on The Interpreter: that it's still far too soon to write off the catch-up growth story for emerging markets, but that it does seem that the overall environment is no longer as convergence-friendly as it used to be. Hence the average future pace of convergence may well be slower than we've been used to.